Shareholders of athletic footwear, apparel and equipment giant Nike (NYSE:NKE) have a lot to celebrate. Over the past five years, Nike stock price has soared 204% versus 74% rise in the S&P 500 (see chart below). Nike doesn’t stay complacent in maximizing value for its shareholders. It works hard to maintain its market leadership. Let’s take a look at five ways that Nike continues to “Just do it” for shareholders.

Nike's Expanding Fundamentals

One of Nike’s stated goals is “Delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value proposition for consumers”. The company definitely believes in delivering interesting new products that interest consumers to the point that they willingly pay higher prices for its products. For example, demand for higher priced footwear drove average selling prices higher in FY 2015.

Nike’s focus on innovation has really paid off for its shareholders over the long-term. Over the past five years, Nike saw its revenue, net income and free cash flow increase 61%, 72% and 31%, respectively. Nike’s revenue and net income increased 5% and 23%, respectively, in Q1 FY 2016. However, its free cash flow declined 59% YoY, due to unfavorable accruals in accounts payable, accrued liabilities and income taxes payables as well as prepaid expenses and other current assets. Increased capital expenditures also contributed to the decline in free cash flow. Nike can still turn this around over the next three quarters.

Nike Keeps Costs Under Control

Nike’s management exhibits a strong desire to keep costs under control and to expand margins. Higher prices combined with increased consumer engagement and operating efficiency contributed to increases in profit margins across the board in FY 2015 (see table below).

Nike (FY 2015)

Metric

05/31/15

05/31/14

% Change

Gross Margin

46.0%

44.8%

2.7%

Operating Margin

13.6%

13.2%

3.1%

Profit Margin

10.7%

9.7%

10.4%

Operating Cash Flow Margin

15.3%

10.8%

41.1%

Free Cash Flow Margin

12.2%

7.7%

58.2%

Source: SEC filings and author calculations

Nike Maintains A Strong Balance Sheet

Another way that Nike demonstrates financial prudence is through its balance sheet. In the most recent quarter, Nike’s $5.4 billion in cash equated to an incredible 42% of its stockholder’s equity. Even more incredible in this age of low interest rates, Nike reduced its long-term debt 10% year-over-year in FY 2015. Nike’s long-term debt stood at 8.5% of stockholder’s equity at the end of FY 2015 versus 11% at the end of FY 2014. In the most recent quarter, Nike’s long-term debt remained the same as it did at the end of the last fiscal year. However, the percentage declined to 8.4% due to a higher stockholder’s equity balance.

Nike Pays A Solid Dividend

Nike’s dividend resides in a safe position. In FY 2015, Nike’s dividend payout equated to 24% of its free cash flow, which represents a conservative readout. Nike currently pays its shareholders $1.28 per share per year equating to a 1% dividend yield.

One downside: Nike Stock Is Expensive

One downside to buying into Nike stock right now is its high valuation. The stock market is well aware of Nike’s prosperity. Currently, Nike shares trade at a P/E ratio of 34, a five year high (see chart below), meaning that its market price risk is high. This also compares to a P/E of 19 for the S&P 500, which also resides at a five year high. Nike’s stock price could correct harder than the S&P 500 in case of a market correction.

Source: amigobulls.com

Conclusion

Nike’s management really knows how to keep an eye on the ball. It doesn’t abide by stagnation on any fronts. It continues to put out new products that consumers want while also keeping costs under control. Nike also increasingly sells on websites, which more than likely represents the future of consumption, while malls and retailers slowly go into extinction. However, it looks like a great deal of Nike’s future prosperity is already baked into the stock price. Investors may want to take a small position in Nike Stock at the current valuations, while adding more in case of a market correction.

Nike Stock Articles & Video

Under Armour has beaten analysts' expectations during the first quarter of 2016. Under Armour set to take advantage of Steph Curry's brand momentum. It is worth investing in Under Armour for the longterm.

Under Armour split releasing class C to shareholders and perhaps making their equity more attractive to smaller investors. With a wave of competition capitalizing on the athleisure trend, Morgan Stanley has reiterated a sell rating on Under Armour. Although they appear to trade at a premium, Under Armour has lived up to their valuation by performing with consistent growth.

Nike's failure to hit high revenue expectations caused panic among investors, regardless of their bottom line. The high Wall Street estimates can be partially blamed on Nike, as they have promised big growth on the horizon. Although it may appear that the company has fallen off track to meet their 2020 revenue goals, they remain a stable investment with a big upside.

I am not an investment advisor, and my opinion should not be treated as investment advice.

I am not being compensated for this post (except possibly by Amigobulls).

I do not have any business relationship with the companies mentioned in this post.

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